We live in the immediate aftermath of the
bursting of two of the biggest financial bubbles in history (if not the
biggest), namely the housing bubble and the credit bubble. Barely nine
years ago, the greatest stock market bubble in history - the
Internet/dot.com mania - climaxed. There have been other, more
localized bubbles, too, in China a couple of years ago and in Japan 20
years ago. This is, in many ways, a bubbly age.

It
is therefore hardly surprising that the new fashion is to seek bubbles
under every nook and cranny. Headlines in the international media
regularly hail something or other as "the next bubble." In Israel, this
very week, an equity analyst at one of the large local investment
houses made headlines by accusing the Bank of Israel of creating a
bubble in the local housing market, by holding interest rates very low.

This, it is now often claimed, is the very crime that the
erstwhile hero and demigod, Alan Greenspan, committed as chairman of
the Federal Reserve Board when he cut interest rates from 6 percent to
1% and held them at what was then considered an amazingly low rate for
a long time - thereby flooding the financial system with vast amounts
of cheap money, which inflated the housing and credit bubbles.

Israel has seen its bubbles, too - and was an enthusiastic and
leading participant in the dot.com mania, although it missed out
completely on the housing/credit bubbles. But there is only a remote
chance that this country will experience a bubble in housing, or in
anything else, any time soon.

Housing prices are indeed rising, but not every
price rise, or even full-scale boom, is a bubble. And when there is a
bubble, don't expect economists, equity analysts, or anyone else who
uses spreadsheets and models as their main tools, to identify it for
you. On the contrary, expect them to explain patronizingly why "this
time, things are different," and why, according to some new
methodology, the patently insane prices are, in fact, perfectly
justified - and likely to go much higher.

The basic fact about bubbles is that they are not economic or
financial phenomena but rather stem from processes belonging to the
fields of sociology and mass psychology. All bubbles require that a
large population, often an entire country, or even, as in the credit
bubble, an entire civilization, loses its collective rationality,
detaches itself from accepted behavioral norms and willingly suspends
its natural disbelief in absurd concepts.

In short, bubbles play out in la-la-land - and
nowhere else. True, the mechanics of financial bubbles require the
ready availability of a huge supply of cheap money, so that the
financial part of the bubble is an essential condition, but
nevertheless quite insufficient in itself. Right now there is a huge
amount of cheap money available around the world, but no bubble exists
that encompasses a large population.

As for the indictment against Greenspan, he is indeed guilty of
many things, including failing in his primary task of the conduct of
monetary policy. But whereas an entire generation of economists and
financiers has grown up with the belief that the financial system is
the arbiter of the fate of individuals and nations, and that the
central bank is the linchpin of the financial system, there are still a
few professional economists who have the intellectual ability and
honesty to know and accept the limitations of their profession and its
tools.

One such economist is Robert Shiller, whose objective analysis
of the US housing market led him to identify the problems and warn (in
vain) against the impending disaster years in advance. Yet he has
sufficient humility to admit that mainstream economic analysis,
grounded as it is in assumptions of rational behavior, cannot handle
bubbles and that the new field of "behavioral economics" is essential
to understand these phenomena. And he has adjusted his thinking and
work accordingly.

Shiller also punctures the simplistic "Greenspan is the
villain" argument by pointing out that the housing markets in the US
and the UK followed remarkably similar paths in the decade prior to the
crash. Yet the monetary policies pursued in the two countries were
quite different. In other words, very cheap money is not THE cause of
the bubble and the central bank is not the primary guilty party.
Rather, it is the entire society, leaders and led, professionals and
laymen, that is to blame for taking leave of its senses and attempting
financial suicide.

Not surprisingly, that's not a popular approach, because the
average guy wants to hear that he was a victim, not a willing
accomplice. But, unpalatable as it may be, it's the truth - about all
bubbles, including both the recent ones and future ones.